Paris Motor Show set to dazzle, despite outlook

A model stands with an Alfa Romeo during the last Paris Motor Show in 2010.

PHOTO: Joel Saget, AFP/Getty Images

By Jennifer Clark, Reuters

Originally published: September 25, 2012

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Europe’s mass automakers will seek to dazzle at the Paris auto show starting on Thursday, revealing over 100 new models ranging from Opel’s new cheap and cheerful Adam micro-mini to the McLaren P1 supercar, expected to cost more than $240,000.

But no amount of shiny chrome can distract carmakers from the deep-rooted challenges facing them in the European market, the world’s most competitive and its worst-performing.

Painful, unpopular decisions are now the order of the day. Even the German manufacturers – which had looked crisis-proof – are no longer immune.

Volkswagen, Europe’s largest carmaker, which had been doing well, stealing market share from its struggling competitors, warned on Tuesday that business conditions had become "significantly more difficult".

The U.S. car market crisis in 2008 was sharp and dramatic. Europe’s slump is shaping up to be a long distance marathon with the finish line a hoped-for 2015 recovery. But if that turns out to be a mirage, the industry faces a bleak future indeed.

"Volume manufacturers need a market recovery – the measures they’ve put in place like cost cutting and staff reductions won’t be enough to return to an acceptable profitability if the market doesn’t bounce back," said Stefano Aversa, co-president at consultancy AlixPartners.

In a situation like this, the smart car executive will be the one who succeeds in calling the bottom of the market and ramps up new model launches before consumers return to showrooms in 2014 or 2015.

Unless, of course, they don’t.

FIGHTING BACK

The Paris show will demonstrate the strategies different carmakers have adopted to deal with the crisis. One will be less of a buzz around full-electric small cars than in previous years, since the initial costs have proved prohibitive to cost-conscious consumers.

Green crossovers should attract attention, however, as carmakers hope to lure environment-conscious families.

Low-cost, no frills models like Opel’s Adam and the new Sandero, made by Renault’s Romanian affiliate Dacia should prove popular.

Since the Geneva Auto Show in March, the crisis has also spread to the premium segment, as growth in China slows.

Last week Daimler warned profits at its flagship Mercedes-Benz car division this year would fall. As recently as late July, it had reassured investors it expected operating profit to be flat at 9 billion euros.

"We are gearing up for a challenging environment," Chief Executive Dieter Zetsche told reporters the day before it emerged Daimler planned to cut over one billion euros in costs.

A RISKY STRATEGY

Volume carmakers are the real victims, however, having seen their market share fall from 85 percent 15 years ago in Europe to 65 percent this year, losing out to premium and low-cost players, figures from AlixPartners show.

Sergio Marchionne, Fiat chief executive and president of industry lobby group ACEA has called for a Europe-wide agreement on plant closures. But with carmakers each going their own way, his strategy looks dead in the water.

Still, a meeting of ACEA members in Paris during the show will be closely watched for any new developments.

For mass-market manufacturers Peugeot, Opel, Fiat and Ford, whose cash-burning surplus plant capacity has swollen in step with the market’s decline, hanging on for a recovery seems to be the strategy – and a risky one.

General Motors Opel unit has amassed $700 million in losses in the first half of this year, prompting analysts to call for its disposal. GM, which is part-owned by U.S. taxpayers, has poured a total of $16 billion into the brand over the past dozen years with little to show for it.

Morgan Stanley forecast earlier this month that Opel could burn a further $12.3 billion of cash over the next ten years. GM says it believes it can turn the unit around, with 23 new vehicles to be introduced by 2016.

Peugeot is losing money by the month, and is projecting "further cash absorption" in 2012 and 2013, "as the potential for cash burn in 2014 remains high," said Fitch in a report that cut Peugeot’s rating to BB- (a notch below Fiat’s) last week.

The closure of its Aulnay assembly plant near Paris and sale of its Gefco logistics business won’t be enough to counter slumping sales.

Ford, which promised decisive action in July, continues to weigh its European options. It said this summer it expected to lose more than $1 billion in Europe this year.

Fiat’s Marchionne has been forced to revise his manufacturing strategy in Italy, saying over the weekend the company had put all investment on hold pending a recovery as it shifts its production from domestic to export.

The company will work with the Italian government on finding a competitive way to export to the U.S. market, where its Chrysler unit is booming. That may take some time.

Any near-term rebound will be slow – if it happens at all – and more than offset by tougher competition.

And if no recovery materialises, the consequence could be a new round of auto industry consolidation in Europe.